After more than two years of heavy-handed rate-raising by the Federal Reserve, which was largely responsible for putting the brakes on a historically hot pandemic housing market, Fed Chair Jerome Powell yesterday explicitly said that the central bank believes the country has avoided a recession and navigated a so-called “soft landing”—but still sees housing inflation as something that will linger longer than expected.
In a conversation with Ellen Zentner, president of the National Association for Business Economics, Powell at least partially abandoned the deeply cautious tone he has hewed to for the past several months when discussing inflation, noting that economic data has been consistently signaling positive for months as the Fed parses out a reversal of its interest-raising campaign.
“There is really nothing I can point to in the economy that suggests that a downturn is more likely (now) than it is at any time,” Powell told Zentner.
After one larger-than-expected cut, real estate professionals are already seeing some signs of a rebounding housing market. And while mortgage rates are clearly a major factor, other issues—and inflation created by housing—remain a potential roadblock to a normalized market.
One of Powell’s more notable admissions in the conversation with Zentner was that the Fed previously underestimated how difficult it would be to bring housing inflation down. While rents, and the monthly price of owning a home measured by the “owner-equivalent rent” metric have begun slowing from their dramatic pandemic level increases, the decrease has been “sluggish,” Powell said.
“I went from thinking at the beginning that this would happen fairly quickly, to now thinking that that process will play out over a period of some years—two, three, four years,” he said.
That suggestion—that the cost of shelter is still high, and hasn’t shown the same moderation of other goods and services—will come as absolutely no surprise to real estate practitioners, who have watched many markets remain unaffordable as home prices and rents have continued to climb. But Powell’s suggestion that it could take up to four years for these increases to return to pre-pandemic levels will certainly be discouraging to buyers, many of whom have seen homeownership rising out of their grasp.
Housing economists previously pointed out that the shelter inflation data the Fed is relying on is lagging, and housing cost increases are actually much lower than current measurements show. Powell was careful to say that he thought housing inflation was on the right trajectory, saying the “direction of travel is clear.”
He was even more explicit in saying that a lack of progress in housing inflation wasn’t necessarily going to prevent the Fed from moving forward in the next stage of its “dual mandate” to achieve maximum employment sustained 2% inflation.
“We’re trying to get back to a world where inflation is 2%, and the combination of (goods, services and housing) is less important than the fact that you get the aggregate back,” he explained. “I just pointed out that goods inflation is kind of back to where it was and so is non-housing services. And that is most of the inflation bucket, but the third one is not there. Any combination of those things will do, but it really looks like the third over time is going back down to where we would like it to be.”
Sticking the landing
But consumers are concerned with many other economic elements and trends as they make housing decisions, and Powell’s other comments reflect an increased optimism for the near-term economy.
Asked to look back on developments since the September rate cut, Powell pointed to upward revisions of Gross Domestic Income (GDI) data which “removed a downside risk” to the economy, he claimed, as well as other revisions to consumer spending data which also suggests purchases can continue “at a healthy level” while people continue to see savings rise.
Looking at the labor market, Powell was somewhat more cautious, saying that there is still “tension” in how the country has added or lost jobs, but claiming the other data might offset any worries from this.
“The level of job creation is maybe not quite at the level it needs to be to hold unemployment constant given assumptions about supply,” he said.
But as far as the pace of interest rate cuts, Powell went back to his refrain that the Fed is making every decision on a meeting-by-meeting basis and looking at every piece of economic data that comes in before making a decision, but also added that if the economy performs “as expected,” there will be two more rate cuts this year for a total of 50 basis points in reduction.
“This is not a committee that feels like it is in a hurry to cut rates quickly,” he said.
Asked point-blank by Zentner about “how (he) is thinking about the next (Fed) meeting,” Powell laughed.
“We’ll take everything into account,” he said. “We will do what it takes in terms of the speed in which we move.”
